Friday, January 24, 2014

Inequality Linkfest

Inequality is the flavor of the season. President Obama recently described inequality as the "defining challenge of our time". Thomas Piketty's Capital in the 21st century, which highlights capitalism's inequality promoting attributes and whose findings bear striking similarities with Marx's epic, has been receiving rave reviews (Economist and Branko Milanovic), rare for an economics book. Two other excellent explorations of inequality are books by Nicholas Carnes and Lane Kenworthy (see essays here and here). In the context of the 50th anniversary of the Great Society Program which sought to eliminate poverty in the US, NYT has two very good articles here and here.

Lane Kenworthy's book is a virtual manifesto for ushering in a social democratic polity and society. He writes in a Foreign Affairs essay about the goal of a Social Democratic America,

Modern social democracy means a commitment to the extensive use of government policy to promote economic security, expand opportunity, and ensure rising living standards for all. But it aims to do so while also safeguarding economic freedom, economic flexibility, and market dynamism, all of which have long been hallmarks of the U.S. economy. The Nordic countries’ experience demonstrates that a government can successfully combine economic flexibility with economic security and foster social justice without stymieing competition. Modern social democracy offers the best of both worlds... Social insurance allows a modern economy to hedge against risks without relying on stifling regulations.

Nicholas Carnes' White-Collar Government : The Hidden Role of Class in Economic Policy Making, uses hard data to analyze the role of class in policy making and how it contributes to widening inequality. He has two posts in Washington Post. He summarizes his book,

Lawmakers from different classes bring different perspectives with them: how they think, how they vote, and the kinds of bills they introduce often depend on the classes they came from. The shortage of lawmakers from the working class tilts decisions about the distribution of economic resources, protections, and burdens in favor of the more conservative policies that affluent Americans tend to prefer. Social safety net programs are stingier, business regulations are flimsier, and the tax code is more regressive because working-class Americans are all but absent from our political institutions...

He brings together a vast array of survey and other data to illuminate these conclusions. On the degree of concentration of power in the hands of the richest, he writes,

If millionaires in the United States formed their own political party, that party would make up just 3 percent of the country, but it would have a majority in the House of Representatives, a filibuster-proof super-majority in the Senate, a 5 to 4 majority on the Supreme Court and a man in the White House. If working-class Americans — people with manual-labor and service-industry jobs — were a political party, that party would have made up more than half of the country since the start of the 20th century, but its legislators (those who last worked in blue-collar jobs before getting into politics) would never have held more than 2 percent of the seats in Congress.

He also uses empirical data to debunk the two standard explanations for this class stratification in the ruling elite - Americans want (voters, of all classes, exhibit a particular preference for legislators from a particular class) and need (people of particular classes have the attributes necessary to rule) it that way. He uses data on roll-call voting in the 106th through 110th Congress (1999-2008) and found,

Like ordinary Americans, legislators who worked primarily in white-collar jobs before getting elected to Congress — especially profit-oriented jobs in the private sector — tend to vote with business interests far more often than legislators who worked primarily in blue-collar jobs... I found similar patterns when I examined other measures of how lawmakers behave: voting scores computed by the AFL-CIO, DW-NOMINATE scores (the vote-based ideology measures often used by legislative scholars), data on the kinds of bills lawmakers introduce, surveys of lawmakers’ personal views about economic issues, and aggregate-level data on the economic policies that state and city legislatures enact. At every level of government, in every time period and in every stage of the legislative process, the shortage of lawmakers from the working class tilts economic policy in favor of the conservative outcomes that more affluent Americans prefer... Likewise, across states and cities, when working-class Americans are absent from our legislatures, tax policies are more favorable to businesses, social safety net programs are stingier, protections for workers are weaker, and economic inequality is significantly worse.

One of Thomas Piketty's central arguments is that the equitable growth pattern of the era of Great Moderation (for a variety of favorable factors including high population and productivity growth, and far-reaching life-style influencing technological progress) may have been an exception to the norm of iniquitous economic growth that characterized both the pre-war and Victorian eras as well as after 1980. The latest version of the Piketty-Saez graph underlines this point.

Piketty analyzes the ratio of the economy's capital to output ratio from 1700 to WWI for W Europe and finds that it hovered around 700%. The wars and depression dragged the wealth level down and the Great Moderation kept it low for sometime, only for the original trends to return in the past three decades.

Once the changes in the underlying variables are a given, the trends in the ratio fits in with standard economic theory. In steady state, the ratio of wealth (capital stock) and income (GDP) would converge to that of savings rate and economic growth. Once the economic growth rate (due to lower labor supply and productivity growth and decline in technological progress) falls (a new normal growth rate which is lower than the Great Moderation era rate), ratio of wealth as a share of GDP will rise and with it capital's share of national income (which is the rate of return on capital multiplied by the total stock of wealth as a share of GDP).